Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 40-year veteran tax professional Robert D Flach.

Wednesday, October 17, 2007

ASK THE TAX PRO – STATE TAXES FOR A NJ RESIDENT WORKING IN NYC

Q. My husband and I recently moved to Millburn NJ. I will be working in NJ while he will work in NYC. We are unsure how NJ and NY state taxes are applied. Does he have to pay state taxes in both states? How does this affect our federal return - do we file jointly or individually?

I have heard of "double tax" for people living in NJ and working in NY, but can't seem to determine whether it is the truth or a tax myth. Thanks for any light you can shed on this subject. I hope this fits into the criteria of the type of question you will answer.

Thanks,

Erin

A. A good question, Erin. And one that applies to many NJ taxpayers.

First, if you must live in New Jersey at least you have chosen a nice, albeit expensive, place to live. I worked for many years in nearby Summit. One suggestion – go to Route 22 to buy gas for your car.

The basic answer is that you will not be “double-taxed”. You will receive a credit on the NJ return for the state income tax you pay to NY on your husband’s wages. However, as with anything involving taxes, it ain’t quite that simple.

If you live in one state (New Jersey) and work in another (New York) you must first pay state income tax to the state in which you work (New York) on the wages earned in that state. The non-resident state (New York) will not directly (see below) tax you on your other income (i.e. NJ wages and self-employment earnings, interest, dividends, capital gains, etc.).

The state where you live (New Jersey) will tax you on all of your taxable income from all sources, including wages earned in another state (New York). Your resident state (New Jersey) will allow you to claim a credit for any non-resident state income tax paid to another state (New York) on income taxed by both states.

Your husband will have New York state income tax withheld from his wages. He will probably not have New Jersey state income tax withheld.

He will have to file a New York State Form IT-203 – Nonresident and Part Year Resident Income Tax Return. The way this works is that first you calculate the NY state income tax liability as if you were a full-year NY resident – reporting all income for the year that is taxable to a NY resident and claiming all deductions for the year allowed for a NY resident. You then divide your New York State Adjusted Gross Income from New York State sources (in this case the wages earned from your husband’s employment in NY) by your New York State Adjusted Gross Income from all sources (as if you were a full-year resident) – and multiply the result by the NY state income tax liability you had initially calculated as if you were a full-year resident.

Sound confusing? Here is an example:

.

Let us say your federal AGI for 2007 is $150,000 and your husband’s W-2 from his New York State based employer indicates $50,000 in NY wages. For simplicity sake you have no federal “adjustments to income” and no New York additions (i.e. non-NY municipal interest) or subtractions (i.e. taxable state income tax refunds, interest from US government obligations like Series EE savings bonds, taxable Social Security benefits, and certain retirement income). Your allowable New York State itemized deductions total $24,999 (not the same as your total allowable federal itemized deductions). You do not have any dependents (NY does not allow a “personal exemption” deduction for you or your husband – only for dependents). So your NY taxable income, figured on all of your 2007 income as if you were a full-year resident, is $125,001. You NY tax would be around $7,725.

Your NY total AGI is $150,000. Your NY source AGI is $50,000. So your 2007 NY state income tax liability would be $2,575 ($50,000/$150,000 x $7725).

On the NJ-1040 resident return you would figure your NJ Gross Income Tax liability on all your 2007 income, from all taxable sources. Let us say this comes out to $4,860. You would then divide your NY source income, say $50,000, by your New Jersey Gross Income, say $150,000, and multiply this by the $4,860. This would give you a credit of $1,620 ($50,000/$150,000 x $4860) for the $2,575 in state income tax paid to NY. So your 2007 NJ Gross Income Tax liability would be $3,240 ($4860 less the $1620 credit).

You will note that you paid $2,575 in state tax to New York, but got a credit of only $1,620 on the NJ-1040. This is because the NY tax rate, 6.85%, is higher than the 5.525% NJ rate.

You will also note that your initial NJ Gross Income Tax liability – like the initial NY tax liability - is based on all your income from all sources – including the salary taxed by NY. If a large portion of the total income taxed by NJ represents earnings also taxed by NY it is very possible that you will have a balance due on your NJ-1040 despite the credit, which could be substantial enough to require quarterly NJ estimated tax payments to avoid underpayment penalties.

Another area of concern is the fact that the NJ state tax is a “gross” tax, while NY for the most part follows the federal 1040. Certain deductions allowed to reduce NY source Adjusted Gross Income are not deductible against NJ Gross Income. For example, if you are making deductible IRA contributions you can allocate a portion of the contributions to your NY source earned income and claim an adjustment on the IT-203. NJ does not allow a deduction for IRA contributions. Also, NJ does not treat contributions to a Section 125 medical “flexible spending account” as “pre-tax”, while NY does. So the amount of NY source income taxed by NY may be less than the amount of your husband’s NY wages that is taxed by NJ.

If the $50,000 NY source wages from the above example represents $53,000 in gross salary and $3,000 in federal and NY “pre-tax” FSA contributions, than $53,000 will be taxed by NJ and you will only be allowed to use $50,000 as “income actually taxed by other jurisdiction” in the calculation of the credit.

Or if you are permitted a $5,000 deductible IRA contribution on your federal 1040, you can claim a % of this as an adjustment to income on the NY return. The amount taxed to NJ would be $50,000 (no “pre-tax” in this example), but the amount used in the credit calculation for income taxed by NY would be the $50,000 minus the allowable NY IRA deduction.

You will only be taxed by NY on wages actually earned while physically in the State of New York. If you spent 5 days at a work-related conference in Chicago and 2 days training at a branch office in Connecticut you do not owe NY tax on the allocated earnings for these 7 days. Because, as discussed above, the NY tax rate is higher than the NJ tax rate, it is very likely that you will pay less net state tax on money taxed by NJ. So you should keep track of any days that your husband works in a state other than New York. Be advised that days worked at home do not count as days outside of NY. If your husband works one day a week at home in NJ it is the same as if he went into the office in NYC.

It is not as easy as saying $25.00 per hour x 8 hours x 7 days = $1,400.00 earned outside of NY. There is a complicated formula that must be used to allocate the income.

By allocating some of your NY W-2 wages to NJ you will increase your NY refund, but you will also increase the balance due to NJ – such that you may be penalized for underpayment of estimated tax to such an extent that it wipes out the net state tax savings from the allocation.

Since you are working in NJ you should have the maximum amount of NJ Gross Income Tax withheld from your wages. If you are not already claiming “Married- but withheld at higher Single Rate–0”, or just “Single-0”, for NJ income tax withholding purposes you should be. You may also need to have an additional amount of NJ state income tax withheld. You can file a separate NJ-Form W-4, other than your federal Form W-4, so you can have a different withholding status for federal and NJ state taxes.

You should prepare a preliminary 2007 NJ-1040 and 2007 IT-203 in November to see where you stand with your Uncles Jon and Elliot and see if you should have additional NJ tax withheld or make a 4th quarter NJ estimated tax payment.

The fact that you work in two different states does not affect how you file your federal Form 1040. You should determine whether to file joint or separate federal returns in the same manner as you would if you both lived and worked in the same state. See my posts on “Joint or Separate? That is the Question” Part I and Part II. In your case, you would file the NJ and NY state income tax returns using the same filing status as you use for your federal income tax return.

As you can see from this long and perhaps confusing answer - multi-state issues are involved and complicated. Anyone in your situation should most definitely consult a tax professional.

I hope I have provided some help, and not made you even more confused. Let me know if you need me to clarify any of the items discussed above.

24 comments:

Anonymous
said...

I have looked all over and hope you can help. I also live in NJ and work in NY. I always paid NY state tax but my new job is taking out NYC taxes, please advise if this is right. I went to my employer and he told me I'd get it back all at the end of the year but I know city tax is different then state. Thanks for any help

Your employer is wrong in withholding NYC local income tax on a NJ resident. However, he is correct when he says that you will get it all back at tax time.

Years ago NYC had a minimal non-resident payroll tax on earned income (wages and net earnings from self-employment), to which NJ residents were subject. That tax was repealed as of July 1, 1999. Now the City of New York only taxes its residents. FYI, many taxpayers who live in New York City pay about 10½% in combined state and city income tax on each additional $1.00 they earn.

As a New Jersey resident you should not have NYC local income tax withheld from your wages.

The separate NYC (and Yonkers, which also has a local tax on residents) income tax is calculated and reported on the New York State income tax return, IT-201 for full-year residents and IT-203 for part year and non-residents. In your case the NYC tax liability would be “0”. You would claim the NYC local income tax withheld, along with the NYS tax withheld, on Page 4 of your IT-203 (Line 63 on the 2006 return). Your NYS refund will be increased, or your balance due reduced, by the amount of NYC tax withheld.

I am a bit confused about this whole working in NYC and living in NJ ordeal. I moved from NYC in part to avoid the ~3.5% NYC tax, which adds up. But I also assumed that I didn't have to pay NY state tax and only had to pay NJ state tax due to some NY-NJ tax agreement.

My wife and I, both working in NYC, expect to make a combined $220-245K. And we rent in NJ,so our only large itemization would be state taxes. How much in state tax would I pay now (work in NY & live in NJ) compared to when I lived and worked in NY state, not including the NY city tax. Can someone please simpilfy this for me. Thank you.

There is no special “reciprocal” agreement between New Jersey and New York regarding state income taxes, as there is between New Jersey and Pennsylvania.

As explained in the posting, a New Jersey resident who works in New York must first pay New York state income tax on his NY earnings. He then claims a credit on the NJ resident return for the tax paid to NY.

Since you and your wife both work in NYC, you must both pay NY state income tax on your W-2 earnings.

By moving to NJ, in addition to not having to pay the NYC local income tax, your non-NY source income - interest, dividends, capital gains, etc - will be taxed at the lower NJ rate.

As I mentioned in the post, you should keep track of any days physically worked outside of New York State so they can be taxed at the lower NJ rate.

I work for a firm based in FL and the territory I cover is NYC. I know that sounds odd but it's the nature of my position. I spend about 8 business days a month in NYC soliciting sales for my firm that is not based in NYC. My employer is withholding tax on my salary as well as my commissions. Is that appropriate or are they being proactive due to NY's aggressive state auditers? Any insight would be appreciated.

If you are not a resident of New Jersey you would file Form NJ-1040NR to report “New Jersey source” income. If you have NJ-source wages and you worked partly inside and partly outside of the State of New Jersey, and the amount of New Jersey state wages is not properly reported in the State Wages box on your Form W-2, you would determine your NJ taxable wages using Part III of the Form NJ-1040NR. This is basically the same formula I discussed in my post that is used for a NJ resident to calculate New York taxable wages.

If you are a NY resident working in NJ and the NJ State wages reported on your Form W-2 reflect your total wages for the entire year (not necessarily the same as the federal wages – most likely more due to NJ adjustments for Section 125 cafeteria plans) and you spent several days physically working outside of the State of NJ – attending a convention or conference in Las Vegas, visiting clients in Delaware, etc – you would do the same as I instructed in my post for a NJ resident working in NY.

While the instructions for Form NJ-1040NR do not specifically address the issue of days worked at home, I would expect that the same rule would apply as for a NJ resident working in NY.

Most states today are aggressive in the area of “nexus” - the connection required to exist between a state and a potential taxpayer such that the state has the constitutional right to impose a tax – and will impose non-resident tax whenever there is even a hint.

In your case there is an actual physical presence in New York – your 8 days a month working in NYC. I do not think your employer is being “inappropriate”. They are also not necessarily being “proactive”. They may have had some dealings with NYS, or other states, on this subject in the past (i.e. an audit) in which they were required to withhold NYS, or other state, tax. I don’t expect they would want to go through the hassle of withholding and remitting NY state income tax, with all the corresponding required paperwork, if they did not have a good reason.

You did not mention if the employer is withholding NYS tax on your entire salary, or just for the 8 days per month you are in NYS. If they are withholding from the entire salary it may be because your sole territory is NYC and the nexus is not based just on physical presence but also on some kind of economic activity test.

Unfortunately because you live in Florida there is no Florida state income tax against which to claim a credit for the state tax you pay to New York. The NYS withholding is deductible on Schedule A of your Form 1040.

FYI, I am not an expert on interstate commerce or nexus, nor do I want to be. I do not have any experience in this area, nor, again, do I want any. My related experience is limited to preparing a non-resident NYS return. I have actually never had a client with a similar situation – all my non-resident NYS returns concerned NJ residents who actually worked in a NYS office.

Thanks for this post, helped me a lot and it was a lot more layman-friendly than the NY State-provided lingo I read that made my head spin.

I work in NYC and live in Jersey and a friend of mine I commute into the city with who is in the same living-working situation (a Controller for a real estate concern in the city) told me that he actually has no NYS income tax withheld from his paycheck and simply pays Jersey what is due at tax time -- no credit calculations.

Can I ask my emplyer to not withhold NYS income tax? And if so, is it wise to do so?

If you physically work in New York State your wages are subject to New York state income tax. The fact that no NYS income tax is withheld makes absolutely no difference.

You certainly should not ask your employer to stop withholding NYS income tax. For one thing, just asking the employer not to withhold state income tax does not relieve the employer of his obligation to do so. You would have to file a NYS Form W-4 and claim excessive withholding allowances. Even if no tax is withheld you would be liable for NY state income tax – and would be severely penalized for “underpayment of estimated tax” if no tax is withheld.

Even if no NY state income tax is withheld your Form W-2 would show state wages and identify NY as the state. A copy of the W-2 would be sent to the NYS Department of Taxation and Finance.

Your “friend” is probably able to get away with this because as Controller he probably either prepares the company’s W-2s or directs their preparation. When he gets caught he will be subject to all back NY state income taxes plus substantial penalties and interest.

You should never pay attention to tax advice provided by a Stranger on A Train!

Thanks for the post and the site. Very useful. In the whole NY/NJ tax saga, there is one additional angle that I am hoping you can shed light on. <>The issue has to do with how and what states taxes are counted as "recoveries" in Federal Taxes. To make this tangible, I itemized by Federal taxes in 2007 and used states taxes (as oppose to sales tax.) For the same year I received a refund from NY state but paid taxes (and penalty) to NJ. Now I am filing 2008 Fed taxes and need to report refunds on line 10 of form 1040. What do I report - 1. Is it 100% of the refund from NY or 2. It is the net of refund from NY - Taxes/Penalties paid to NJ.<>Thanks.

The cleanest, and safest, way is to report 100% of the refund on Line 10 and claim the NJ tax paid (not the penalty) as part of your state and local income tax deduction on Schedule A. This way when "Sam" does his 1099 matching it will show that the full amount on the 1099 for the refund is reported on Page 1.

If doing it this way will increase your AGI such that it materially affects a tax benefit - i.e. puts your AGI over $130,000 or $160,000 with regards to the deduction for tuition and fees - I would enter the net refund (NY refund less NJ tax, but not penalty, paid) on Line 10 and perhaps attach a statement showing the netting.

I need your help. I'm a consultant. I have a NJ Corporation for which I work for. My corp subcontracts services through another NJ coporation. I do work physically in NYC but I have been withholding NJ state income taxes from my wages and therefore not filing a NY state tax return but a NJ state tax return. My company is not even registered to do business in NY since it does all its business with NJ companies. When I started this position in 2005 my accountant at the time advised me that I did not have to pay NY state tax but should continue paying NJ state tax. My current accountant seems to agree but I now have concerns. Can you please shed some light on this for me. And if I was supposed to be filing NY state returns, can I just amend ny NJ returns and try to recover some of the credit from them? What can NY state do to collect the funds from me?

I know this is an old post, but you have been very helpful to others, hoping you can be helpful to me...

My boyfriend and I are considering moving in together. He lives and works in NJ, I live and work in NYC. We are trying to decide which state will better for us for tax reasons. Will living in NY and working in NJ, or living in NJ and working in NY... it is VERY confusing to me, and I was hoping you can help sort it out.

I have a question. I live in NJ and work in NJ office but the company I'm working for is registered in NY. Should I be paying both NJ and NY taxes? SOmebody who works with me says they withheld NY taxes, and she has to pay NJ tax at the end of the year. She said she gets refund on most NY tax but not all. Is this right? My accountant says I should only pay NJ tax. Who is right?

If you both live AND work physically in New Jersey you should pay NJ tax only. You should have NJ state income tax withheld. You should NOT have NY state income tax withheld. You would only have NY state income tax withheld if your office was physically located in NY.

Hello, I just wanted to say thank you for this post and this blog in general. You have approached the subject and given advice on it and plain English (i.e. normal speak and not tax jargon) and for that, I am appreciative (and I think I can definitely speak for others as well).

I'm also in the same boat as most of your clients in that I am a resident of NJ but work in NYC. I don't believe I've ever had a NYC employer also withhold NJ state taxes, but was wondering if there would ever be a case for an employer to do so.

I work in NY and reside in NJ. For the past 7 years - I always received a refund of $20 to $30 from NJ. 2013 I had to pay over $700! I do my taxes on Taxact. There was no life changing event in the past 7 years so I couldn't understand why I had to pay that money. Can you help?

Sorry - I would not be able to properly explain why you owed for 2013 without reviewing in detail your NJ-1040, which, since I do not want any more tax clients, I will not do.

There are several factors that could be in play. An increase in income, a change in withholding, etc, etc, etc. Or you could have entered the information into the program wrong.

That is one problem with relying on a "box" or an online tax program to prepare your returns - there is nobody to explain the resulting return to you. And, to be honest, there is no guarantee that the return is even correct.

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